China Companies Inching Into Europe

For rich Chinese corporations with global ambitions, the euro zone has never been so cheap. Yet, to say China is buying Europe would be an overstatement. For its size, and wealth, China is far behind the U.S. in foreign direct investments far from home.

China is going shopping.

Their flea market lies west of the Great Wall.

With trillions of dollars in foreign cash reserves, and depressed assets littering rich Western Europe, China is expected to spend around $2 trillion buying up and starting up companies on foreign soil. Their favorite destination is Europe.

Europe is experiencing the start of what the Rhodium Group called "a structural surge in outbound direct investment", and all of it by Chinese firms. The take-off was only recent: annual inflows from China corporates into the E.U. tripled from 2006 to 2009, and then...tripled again by 2011 to 7.4 billion euros ($10 billion) for the year. The number of deals with a value of more than $1 million doubled from less than 50 to almost 100 in 2010 and 2011, according to a Rhodium Group 103 page report released last week titled "China Invests in Europe: Patterns, Impacts and Policy Implications."

Chinese direct investment in Europe is driven overwhelmingly by commercial motives. Chinese policy is playing a role, but mostly in terms of getting government out of the way so firms can make more rational judgments about locating operations. Direct political guidance has played a very minor role in Chinese investment in Europe thus far. China’s industrial policies and encouragement (via offered low-interest capital) of going abroad are impacting investment decisions, but they are not the primary reasons why firms from China are appraising opportunities in the European Union. The mix of industries targeted, the high number of private enterprises making investments, and the competitive behavior of companies from the People’s Republic after they arrive and set up shop in Europe all point to profit as the greatest motive in China’s outward FDI story." -- by Thilo Hanemann and Daniel H. Rosen of Rhodium Group.

China's foreign direct investment (FDI) push is relatively new. Most know about China's international investments in natural resources in Brazil and Africa. But there is more to it than that. In Europe, tech companies like Lenovo are buying up smaller companies, or investing in greenfield projects.

China firms are increasing buying up Europe. Ten years ago, there were less than 20 cross border deals. Today, there's been 573 deals have been done between 2000 and 2011, with Germany the leader at 146 China deals. Geographically, China’s companies prefer the troika of France ($5.7 billion), the United Kingdom ($3.6 billion) and Germany ($2.5 billion). In terms of sector mix, a telling shift is underway from natural resources and trade facilitation toward a far broader range of industries and assets spread widely across Europe. And the majority of Chinese firms investing in Europe are private, though state-owned firms account for two-thirds of investment value simply because they dominate the playing field in capital intensive businesses.

While the total values of the mergers and acquisitions and official direct investment into Europe is small by comparison to other major economies -- namely Japan and the U.S. -- China is clearly inching its way into Europe.

Outliers on the upside are Hungary and Greece. Both countries attracted one large-scale investment that pushed them up the rankings. Hungary received a $1.9 billion investment in the chemical sector from the sale of Borsodchem to Yantai Wanhua Polyurethanes. Greece awarded China’s COSCO a long-term lease in the port of Piraeus, which was tied to an investment of more than $700 million for the modernization of the port’s container terminal. Sweden fares well in the European ranks, thanks to the $1.5 billion acquisition of Volvo Cars by Geely and related follow-up investments. Another high performer is Romania, attracting several greenfield manufacturing investments, among them a plant by Shantuo Agricultural Machinery Equipment to produce tractors.

Chinese investments are spread across a wide range of sectors in both manufacturing and services, according to the Rhodium Group report. Nine of the 30 sectors they track registered $1 billion of investment or more. The top four industries by value have all seen at least one large-scale acquisition: utilities (CIC-Gas de France); chemicals (Wanhua-Borsodchem); automotive (Geely-Volvo); and lastly coal, oil and gas (Sinochem-Emerald).